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Diebold Nixdorf puts the squeeze on costs in Q1

As Gerrard Schmid embarks on his second year at the helm of Diebold Nixdorf, it seems fair to say that his most notable achievement to date is having squeezed so much cost out of running the company.

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May 3, 2019 by Suzanne Cluckey — Owner, Suzanne Cluckey Communications

As Gerrard Schmid embarks on his second year at the helm of Diebold Nixdorf Inc., it seems fair to say that his most notable achievement to date is having squeezed so much cost out of running the company.

In a Q1 earnings call on Tuesday morning the Diebold Nixdorf president and CEO summed up the effects of this cost-cutting on the company's results to date in 2019:

Revenue growth of 3% in constant currency, coupled with the benefits of our DN Now transformation initiatives, enabled the company to deliver improved profitability and cash flow in the first quarter. …

Our gross margin expansion of 60 basis points was fueled by operational initiatives including our services modernization program, global manufacturing improvements and increased discipline in terms of how we package and sell our solutions. 

More importantly, we significantly improved our seasonal cash use by more than $90 million versus the prior-year quarter as we proactively managed collections and payments across the company.

Schmid credited growing momentum from the company's DN Now initiatives for a recent improvement to profitability and cash flow. Ultimately, the company expects to realize $400 million of gross savings through the year 2021.

"This program is simplifying our operations, reducing costs, and enabling a greater focus on our customers," he said.

Still streamlining

In streamlining its operating model, the company has cut approximately 1,400 employees to date, an initiative expected to generate approximately $100 million in gross savings through 2019 and $130 million of savings by 2020.

"Equally as important, our new structure has clarified roles and responsibilities, which is driving increased accountability across the organization," Schmid said.

Diebold Nixdorf also has streamlined its ATM product portfolio and manufacturing footprint, an effort that continued through Q1 as the company relocated some production and prepared to close a number of "subscale" facilities.

Importantly, the company has also improved in terms of net working capital, which has declined from 24% a year ago to a Q1 number of 19.1%.

Diebold Nixdorf continued to shed noncore assets in Q1, it terminating an unprofitable business in Venezuela, liquidating a retail CIT business in Europe, and divesting an IT consulting business in Europe.

The company also continued to work toward a number of small divestures, as well as a larger, unspecified sale that Schmid said was progressing, but not as rapidly as expected.

Costs incurred through third parties has also come under review with management working to reduce expenditures related to procurement, office leasing, telecommunications and even data storage.

No stone will remain unturned, it seems, as the company seeks to reduce its selling, general and administrative expense from the current level of around 17% to a target of 13%–14%. The closer the company edges toward its goal, though, the harder it becomes to attain. From last year to this, there's been little change, Schmid said.

Pursuing profits

Diebold Nixdorf doesn't expect merely to cut its way to profitability, though. Even as they trim back cost, leadership is casting a keen eye on product, software and services margins, shunning a "win at all costs" mentality in the especially price-driven markets of India and China, Schmid said.

As a result, revenues from Eurasia as a whole have declined — and could remain depressed for some time, Schmid told an analyst during the Q&A session of the earnings call. 

"[F]rom our vantage point, markets like China and India are incredibly challenging to generate a reasonable, return and therefore it's not clear to us that over the medium term those markets improve substantially," he said. "You know when we look at other markets in Asia, I think there are markets in the Southeast Asia region, plus further south, there are certainly markets where margins remain very robust. … So, we're going pick and choose where we compete in Asia."

An uptick in revenues generated in the Americas helped to offset weakness in Asia, with an increase of 11% in the former offsetting a decrease of 4% in the latter, both in constant currency.

After dying down somewhat over the past year, currency headwinds have picked up briskly again Diebold Nixdorf Chief Financial Officer Jeff Rutherford said in his prepared remarks.

"The foreign currency headwind in the quarter was significant at nearly 6.5% points or about $66 million, due to the strengthening of the U.S dollar against the euro, the Brazilian real, and the British pound."

He added that currency headwinds could be expected to result in a "modest" year-over-year decline in revenues, with a full-year total of $4.4 billion to $4.5 billion expected and adjusted EBITDA of $380 million to $420 million, helped along by approximately $160 million in DN Now savings

Loading the pipeline

Rutherford said that, per historical evidence, revenues can be expected to gain momentum throughout the remainder of the year — particularly in the second half — improving from quarter to quarter on the Q1 total of $1.0 billion.

During the Q&A, Schmid also said that momentum could be expected to grow throughout the year. 

"We are continuing to see very strong pipeline and sales momentum in the Americas and expect that to continue on a go-forward basis," he told an analyst on the call. "[W]e're starting to see Europe show some early signals of momentum in particular in Western Europe.

"The Middle East is showing very strong momentum for us right now, and as we've pointed out for the past several quarters, we've maintained a very, very disciplined focus upon Asia. As a result, we're willing to concede market shares in favor of profitable business. So, we're seeing our order activity moderate in that market."

About Suzanne Cluckey

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Suzanne’s editorial career has spanned three decades and encompassed all B2B and B2C communications formats. Her award-winning work has appeared in trade and consumer media in the United States and internationally.

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